1. Regulation in the Water Sector
Bill Kingdom, Eric Groom and Jonathan Halpern

2. Program Objective
Address realities and practical issues in design of regulatory arrangements
i.e. “rules and institutions which set, monitor, enforce and change prices and service standards for water providers
Identify broadly applicable solutions to practical problems as well as project specific solutions

3. Motivation
Diverse experiences on what constitutes “establishing sound regulatory framework”.
Pat formulas: eg. “establish independent regulator”, “codify regulatory principles in law”.
False dichotomies: contracts versus regulation, discretion versus contract completeness.
Non sequitors: establish national body to “regulate” locally issued contracts/service providers .

4. Scope of Research Program
6 Activities:
Short explanatory notes on key topics
In-depth case studies
Development of low-discretion rules for regulation
Pro-poor regulation of water services
Incentive mechanisms for management contracts
Regulating publicly-owned WSS utilities
Discussion will focus on the output of the first 3 activities.
Thanks to BNWP, PPIAF and World Bank for funding

5. Limit the scope of regulation

6. Designing regulation Narrower scope?
Many other options: e.g contracts, monitoring units
Supporting or alternative policy options: OBA, decoupling prices and provider revenues, pre-set transition paths
Use existing institutions

7. Key attributes of good regulation and regulatory design
Coherence
in analysis and decision-making
between prices and service standards
Predictability and credibility
consistent over time
based on known rules
Legitimacy, transparency and accountability
consistent with policy frameworks
known, transparent processes
basis of decisions/price changes disclosed

8. Regulation by contract can work – but it needs help

9. Design in the politics – transparently
Pricing for essential services is ‘political’
Problem is non-transparent, short-term and time-inconsistent political intervention
But government support and policy consistency is important for regulatory credibility and sustainability
And government’s should make decisions on difficult policy trade-offs
Need to allow for politics but through transparent mechanisms – eg OBA, concessions providing provider with contractually guaranteed revenues

10. Limit discretion to increase certainty
Wide Discretion + Independence = high risk
Combining wide discretion and independence of decision-making => high risk for service providers and governments
=> greater pressures and risk of intervention in practice
Risks are larger if the starting prices are highly distorted or a long way from cost-recovery
A transition path with less discretion up front may increase practical independence (eg ‘hybrid’ models)

11. Mechanisms for limiting discretion
Prior specification of initial price path
In legislation, regulation or contracts
Clearer objectives, processes and methodologies
Transparency & disclosure of analysis
During review and in reporting of decision
Mandatory use of experts (and disclosure)
Effective appeals processes (including expert panels)
“Low discretion rules” for price resets
Can be incorporated in contracts, legislation or regulations
Or in rules made by the regulator to self-limit discretion

12. Scope of Rules The rules focus on:
The cost components or scheduled price/revenue resets
The rules for an extraordinary review: i.e.
Specification of method of triggering a review
The processes for an extraordinary review
The methodology to be adopted in assessing the impact of the trigger events on costs/revenues
Translating cost/revenue impact into price adjustments
Several important issues are not yet covered
E.g. accounting rules, information collection and reporting, demand estimation

13. Summary…moving from the standard model

14. … to a better approach to regulatory design

15. To Find More Information
Discussion Paper #6: Explanatory Notes on Key Topics in the Regulation of Water and Sanitation Services:
Handbook for Evaluating Infrastructure Regulatory Systems (Ashley C. Brown, Jon Stern, Bernard Tenenbaum and Defne Gencer) : Coming to a website near you in November. Available now in hard back.